CBA Live analysts, regulators talk CRA reform, relationships

Top of mind for a large portion of attendees at the Consumer Bankers Association’s (CBA) 2019 annual conference in Washington D.C. was if and when federal regulators will take action to modernize Community Reinvestment Act (CRA) requirements, as well as the importance of investing in technology and how to open lines of communication between regulators and banks.

As it does every year, the association polled conference attendees to gauge what they believe banks’ top priority should be over the next year. Half of respondents indicated that it should be “investing in technology.” Even after hearing a series of debates in favor of four other priorities, such as “growing deposits” and “consolidating branches,” attendees still overwhelmingly indicated that technology is the No. 1 thing on their minds.

Through its general session polling efforts, CBA also found that about 80 percent of attendees believed that large banks will be open to servicing the marijuana industry if Congress legalizes cannabis, but that less than 47 percent were confident that Congress would “enact meaningful CRA reform.”

CRA modernization was one of the featured topics of debate during CBA’s policy roundtable discussion, patterned after the ESPN sports talk show “Pardon the Interruption.” Buckley LLP Partner Jonice Gray Tucker and Cowen Washington Research Group Managing Director Jaret Seiberg discussed what the future holds for CRA modernization, examinations and enforcement, small-dollar lending and several other issues facing the industry.

CBA President and CEO Richard Hunt, who moderated the panel, asked Tucker and Seiberg how likely it is that Comptroller of the Currency Joseph Otting would adopt rules to overhaul CRA requirements without direction from Congress or other regulators. Hunt noted that Otting has said that he would take such an action if necessary.

Seiberg said he did not believe Otting would make such a move, asserting that getting agency cooperation is essential to creating uniformity with respect to CRA measures.

Tucker cited recent statements by regulators at the Federal Reserve and others as indicating that there will be no need for Otting to “go solo” on CRA reform.

“I don’t think there’s any doubt that the prudential (regulators) universally recognize that there needs to be change and I am optimistic that they are going to get it done,” Tucker said.

When asked by Hunt what is the greatest challenge to reforming CRA, Tucker responded, “The devil is in the details.”

Seiberg noted that it is to be expected that Democrats will want changes to any proposal put forth by either congressional Republicans or Trump-appointed federal regulators. Such anticipated changes, however, are not likely to be those regulators are willing to make, he said.

“I’m also very nervous about this easy ratio calculation that the comptroller is talking about,” Seiberg said, referring to Otting’s proposal to establish a single metric for banks to use to calculate their CRA responsibilities. “Whatever is easy today, by a future comptroller, can be easily changed. And I don’t think you want something that can be so easily manipulated.”

Hunt later interviewed Otting and FDIC Chairwoman Jelena McWilliams during the closing general session, asking them about many of the concerns about CRA raised during the roundtable discussion.

Acknowledging that OCC was criticized for acting alone in issuing a notice of proposed rulemaking (ANPR) on CRA reform in August 2018, Otting said he hopes that any further action on that front is the result of a conjoined effort by regulators with feedback from industry stakeholders.

“There have been some bumps. We put the ANPR out by ourselves; I would have preferred that we did that together,” Otting said. “We finally got to the point where I said we need that feedback from the market, we need that feedback from community groups, we need it from the banking industry before we go to the next level.”

Despite the criticism OCC faced after issuing the notice, Otting said that it generated movement with regard to conversations about modernizing CRA requirements.

Otting and McWilliams met briefly on stage between their respective one-on-one interviews with Hunt, exchanging playful barbs at one another.

Hunt asked McWilliams whether she believed CRA standards were working as intended. Referring to her experience in the private banking sector, she said there is a need for more certainty from regulators.

“I do know, having spent some time working for a bank, that you are almost never 100 percent certain that something exactly qualifies as a (CRA) investment,” McWilliams said.

When looking back through their portfolios once the three-year CRA exam cycle nears its end, she said, it can be difficult for bankers to determine, in retrospect, whether a particular action had the necessary impact on their community to qualify under CRA standards.

“I think we need to provide more certainty for the CRA and to figure out, in the digital world of banking, what is an assessment area,” McWilliams continued. “We need to truly give certainty that if you make an investment (under CRA standards), that that investment is going to qualify three years from now.”

That sort of certainty, McWilliams said, would facilitate an increase in CRA investment from financial institutions.

One of the most critical problems with regard to CRA is that even many of the most knowledgeable people in the industry struggle to understand it, Otting said.

“I have probably met with over 1,100 people about CRA since I’ve been in Washington D.C. … and of those 1,100 people, only two people could accurately describe to me the way that CRA was measured, believe it or not,” Otting said. “On Monday night, I was with [someone] that I would consider to be one of the top 10 most knowledgeable CRA people in the world and I asked that person to give me how CRA is evaluated. And he had a methodology but that methodology was not the way that CRA was supposed to be measured.”

There are several key aspects of CRA on which Otting believes there is widespread lack of understanding, including what qualifies as a CRA-related activity in various geographic areas. That difficultly in determining what is covered under CRA can have adverse implications on a bank’s lending and investment patterns and, by extension, its low- to- moderate-income customers.

Otting and McWilliams both said that were is work to be done to engender more trust between banks and regulators so that the two parties can engage in dialogue about actions entities are considering to avoid any problematic activities.

On a similar note, McWilliams said one of the first things she did after taking office at FDIC was arrange for calls with several of the larger banks FDIC oversees in an effort to establish a culture of “open communication” with the banking industry. The knee-jerk response from many of those banks was one of concern, questioning why FDIC wanted to speak with them, she said, which is not the sort of relationship she believes should exist between regulators and the covered entities.

“It’s not about being lenient about doing our job; it’s about creating an environment where [companies] are not afraid to come to us,” McWilliams said.

She added that the sooner a bank approaches a regulator to discuss a possible concern, the sooner the regulator can identify a pattern or a possible systemic issue and work with the entity to mitigate the problem before it becomes too great.

To help create the necessary sense of trust to create the open communication she wishes to see between regulators and banks, McWilliams said regulators should not go into institutions “looking for dirt.” To illustrate what she meant by that, she used an analogy about cleaning up after her dogs.

Professing that she cleans her house often, McWilliams said she would often feel frustrated about constantly finding white hairs, left by her dogs, in the corners of her house after she’d just finished cleaning. Eventually, she decided to accept that there would always be some hair around as long as she had dogs, but that didn’t mean that the house was dirty.

“So as you look at bank supervision and our examinations, I use the analogy that if you know that the house is clean, don’t go looking for dirty dog hair – don’t go looking for dirt,” she said. “But, be aware that there is some dirt and act appropriately to deal with it. Then I tell people, ‘If you sweep the dog hair under the rug, we will find it.’ ”

Otting noted that CRA criteria can vary based on geographic location, explaining that regulators rely on a point system for certain activities involving lending, investments and community service, which count towards an institution’s CRA compliance score. He noted how an entity’s CRA rating often correlates to other entities within its assessment area.

“What say about that system today is you could be the best of the worst or the worst of the best and it will impact your rating,” Otting said. “If you are the best of the worst in your market that does really bad in CRA, you could be outstanding (by comparison). But that same person, in a normal market, probably would be marked as ‘needs improvement.’ ”

That fact highlights the need a clear, objective way of measuring an institution’s CRA compliance, Otting said.

He also stated that CRA provisions on assessment areas for banks can be restrictive in a way that prevents recognition of activities that would otherwise qualify for CRA credits under more flexible assessment area criteria, and that there needs to be more accurate method of assessing the volume of CRA activities banks participate in, asserting that he believes there is much more such activity than current measures indicate.

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The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. have issued information on the host state loan-to-deposit ratios, which are used to determine compliance under Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Review the ratios in Dodd Frank Update’s Library.